# Let’s Party!

Exploring whether regression coefficients differ between groups is an important part of applied econometric research, and particularly for research with a policy based objective.

For example, a government in a developing country may decide to introduce free school lunches in an effort to improve childhood health. However, if this treatment is known to only improve the health of boys from the lowest socioeconomic strata, it makes sense that this group should be targeted to receive the treatment, while the additional public resources, which would have been unnecessarily used on the other groups, could be efficiently allocated elsewhere.

There are two conventional approaches to estimating these potentially differing effects. The first involves manually partitioning one’s data and performing separate analysis (i.e. one regression for boys the other for girls). The second involves including interaction terms in the regression model. The inclusion of interaction terms allows for different groups to have different slopes.

Problems with these aforementioned strategies arise when researchers would like to stratify the analysis across many groups. Splitting the analysis into different groups can be both a confusing (triple interaction terms anyone?) and inefficient way to conduct research. Furthermore, the results of stratification across a large number of groups can be somewhat difficult to present in a research paper (think of a table with one hundred result columns).

Thankfully, the party package on Cran offers a neat solution to the above concerns, as the functions in this package offer procedures for model based stratification. Following a model-based approach has the obvious advantage that it avoids unnecessary splitting of data, and can therefore be seen as a more efficient way of analyzing group differences.

The model based approach takes the regression model of interest and partitions the results into groups based on parameter instabilities indicated by structural break tests. More info on such tests is given in Zeileis (2005).

In the below, I provide a simple example of the party package at work. Obviously, I encourage interested users to read both the package vignettes, and associated literature before performing more complicated analysis on real data. Let there be three groups (z). In group 0, the effect of x on y is -0.5, in groups 1 and 2 this effect is +0.5. Based on the below plot, we can see that the model-based recursive partitioning approach both predicts the splits, and also the correct parameter estimates.

```rm(list=ls())
library(party)
set.seed(1988)

# set up simulated data
z <- sample(c(0,1,2),2000,replace=T)
z1 <- ifelse(z==1,1,0)
z2 <- ifelse(z==2,1,0)
x <- rnorm(2000,0,1)
y <- 1 + 2*z1 + 2*z2 - 0.5*x + x*z1 + x*z2 + rnorm(2000,0,1)

# model based partitioning of regression of y~x
# over groups indicated by z
mod1 <- mob(y ~ x | factor(z))
# nice plot of results
plot(mod1)
```

# Time-Series Policy Evaluation in R

Quantifying the success of government policies is clearly important. Randomized control trials, like those conducted by drug companies, are often described as the ‘gold-standard’ for policy evaluation. Under these, a policy is implemented in/to one area/group (treatment), but not in/to another (control). The difference in outcomes between the two areas or groups represents the effectiveness of the policy.

Unfortunately, there many circumstances in which governments introduce policies and are not able to measure how are well, if at all, they work. A good example of this is childhood vaccinations against disease, since it is unethical to deny some children a potentially life-saving treatment. This makes evaluating these policies difficult, because there is no counterfactual event, i.e. everyone gets the treatment (in this case vaccination).

However, it is possible to evaluate the effectiveness of certain policies with time-series econometrics. For this example, I am going to use a series of monthly road death statistics in Ireland over the period 2003 to present. In November 2011, a new drink driving law was introduced which lowered the blood-alcohol limits. How has the introduction of this law changed road fatalities?

To evaluate this policy, I estimated a simple state space model using the R package sspir. The code I used for this example is almost exactly like the van drivers example in this paper. The following generalized linear model is assumed: Po(y_{t}) = a_{t} + b(LAW) + S_{t}, where the number of deaths, y_{t}, is a Poisson process that depends on a random walk, a_{t}, time-varying seasonal patterns, S_{t}, and the introduction of the law. The b parameter is the measure of the policy’s effect.

The usefulness of this model for policy evaluation, compared to an OLS linear regression for example, stems from the time-varying intercept a_{t}. In effect, this parameter substitutes the counterfactual or control group that we would need in a randomized control trial because it takes into account the underlying trend in the time-series before the policy change. The law dummy variable adds a shift to the underlying trend, acting as the relevant treatment effect.

A full overview of the state space system, and estimation using the Kalman filter is beyond the scope of this blog post. Interested readers should consult this paper and the references therein. The code to generate these results is below.

```> head(road)
deaths drinkdrive ind
1     20          0   1
2     21          0   2
3     33          0   3
4     23          0   4
5     28          0   5
6     37          0   6

mle <- function(psi) {
m1 <- ssm(deaths ~ tvar(1) + drinkdrive + tvar(sumseason(time,12)),
phi=c(1,exp(psi)),C0=diag(13)*1000)
m1fit <- getFit(m1)
return(extended(m1fit)\$likelihood)
}

res1 <- optim(par=c(0,0),fn=mle,method=c("L-BFGS-B"),
control=list(fnscale=-1),hessian=FALSE)
```

The first part of the code sets up the state space system inside a function. The reason for this is to calculate the signal-to-noise ratio, which I call psi, using maximum likelihood. The signal-to-noise ratio dictates the ‘wiggliness’ of the random walk a_{t}. Too much signal will result in a_{t} matching the series exactly. Too little, and the random walk will collapse to a constant term, as in OLS. A similar argument can be made for the time-varying seasonal patterns.

After calculating the signal-to-noise ratio, I estimated the model with the maximum likelihood parameters. The function ssm automatically runs the iterated Kalman smoother, which provides the relevant information.

```# estimate with mle pars
m2 <- ssm(deaths ~ tvar(1) + drinkdrive + tvar(sumseason(time,12)),
phi=c(1,exp(res1\$par)),C0=diag(13)*1000)
m2fit <- getFit(m2)

100 * (exp(m2fit\$m[1,2])-1) # effect of drink driving law

# calculate sd
m2sd <- NULL
thisone <- m2fit\$C[[i]][1:2,1:2]
m2sd <- c(m2sd,sqrt(thisone[1,1]))
}
else
m2sd <- c(m2sd,sqrt(sum(thisone)))
}

# plot 